Fort Collins voters beware of Ballot Question 2B

Proponents of Ballot Question 2B are urging voters to authorize the City Council to borrow up to $150 million to build a municipal broadband system in Fort Collins. Approval of the measure also transfers all the decision making from the citizens of Fort Collins to a Council-appointed board or commission. Fort Collins citizens will not have any voice in the decision as to whether the city would: 1) build a broadband system itself or 2) build a system with a third party or 3) do nothing.

Apart from excluding Fort Collins voters from these decisions, there are several key deficiencies in the information on which the proposed question is based.

First, the $150 million bond issue will require the city to commit the electric revenues from Fort Collins Light and Power as collateral for the bonds. Bond holders for a similar scheme in Longmont required the city to pledge its electric revenues to ‘backstop’ the broadband revenues. Hence, if voters in Fort Collins say “yes” to 2B, they are agreeing to put electric revenues on the line and be willing to risk higher utility rates in the future if the municipal broadband system is not financially sustainable.

Second, the financial track record for municipal broadband systems is poor. A recent study from researchers at the Center for Technology, Innovation and Competition at the University Pennsylvania Law School found that of the 20 municipal broadband systems that reported separate financial results, 11 generated negative cash flow between 2010-2014. For the 9 with positive cash flow, 7 would need more than 60 years to break-even. Only 2 were generating sufficient cash flow to pay off the debt during the lifetime of the network.

In fact, two of the systems that Fort Collins officials visited in developing its business plan for a retail broadband model have poor financial performance. In particular, the study estimated that Wilson, North Carolina would never provide a payback to the municipality. The study also estimated that it would take 412 years for Chattanooga, Tennesseee to achieve a payback on its investment. The Fort Collins Broadband Business Plan does not say anything about the ‘poor’ financial track record of municipal systems, but rather paints an overly optimistic picture of municipal broadband operations.

Third, there are some lessons learned from Longmont’s experience that should be considered in voting on Ballot Question 2B. In particular, Fort Collins voters need to consider the following:

The broadband operation will likely require more funds than the bond issue amount. Longmont’s voters approved a $45.3 million bond issue for the city’s “NextLight” broadband network. As of the end of 2016, NextLight used all of that money and required an additional $7 million loan to complete the build-out of the network.

As noted above, revenue bond financing will require the Fort Collins to pledge the electric revenues from Fort Collins Light and Power to ‘backstop’ the municipal broadband system. If broadband revenues are not sufficient to pay the principal and interest, the bond holders will be paid out of the electric revenues. The bondholders are not bearing the risk of the viability of the municipal broadband operation. Ratepayers in Fort Collins are assuming this risk.

From 2017-2021, Longmont’s NextLight needs a minimum penetration of 43% to achieve ‘breakeven’ —that is, the point where revenues equal operating costs, capital costs, and debt service costs combined. In 2016, Nextlight’s actual penetration was 36.7% (i.e. actual subscribers divided by homes passed). NextLight’s claim of a 53% penetration is distorted in that they are talking about actual subscribers divided by homes that have been through a full marketing cycle.

Fort Collins voters should be leery of risking higher utility bills in the future based on questionable assurances about the viability of municipal broadband.

Ronald Rizzuto, Ph.D., is a professor of finance at the University of Denver who has studied, and consulted with, the telecommunications industry for more than 30 years.